Australia's budget U-turn aims to juice growth

RobTaylor

CANBERRA, Australia--Australia's conservative government ditched austerity for a budget focused on driving growth, as it sought to bolster its sagging popularity and head off a possible downgrade to the country's top-notch credit rating.

Offering generous tax concessions to small businesses to encourage investment, in addition to extra child-care support to push parents back to work, Treasurer Joe Hockey aimed to reach out to conservative heartland voters alienated by the last austerity-focused budget.

The government, led by Prime Minister Tony Abbott, has to call a general election sometime next year. The opposition Labor party accused the treasurer of seeking to hide planned welfare-spending cuts unveiled last year that remain in place.

Like many advanced economies since the financial crisis, Australia is struggling to balance the need for fiscal discipline with policies that unleash growth potential. Still, Mr. Hockey promised to be able to return the country to a surplus within five years--hoping to pacify concern, expressed by Goldman Sachs and others, that Australia could lose its AAA credit rating by failing to end a string of deficits quickly.

Moody's Investors Service said late Tuesday that Mr. Hockey's budget created no surprises and was consistent with a stable AAA rating. Standard & Poor's said the forecasts were broadly in line with the firm's own expectations of moderate and declining deficits.

The tone of Tuesday's budget couldn't have been more different from last year's, which infuriated many voters because of the accompanying stern rhetoric, where alongside aggressive spending cuts Mr. Hockey warned of a "budget emergency," and that an "age of entitlement" was over. The government's popularity among voters immediately plummeted and remains some distance behind support for the Labor party.

"This budget means everything for the Abbott government," said John Warhurst, a political analyst in Canberra. "The politics is crucial. It must be well received."

This time around, the treasurer's language was more optimistic, focused on opportunities for Australia as the global economy rebounds, and as a wave of newly-developed liquefied natural gas starts being exported to the world. Mr. Hockey also promised more funding for Australia's Asia-facing north to help develop it as a regional food bowl.

Labor's treasury spokesperson, Chris Bowen, said planned cuts to spending on welfare, education and child care remained on the table. "This budget is a shambolic mix of two-year measures, political fixes and recycled attacks on Australians," he said. "This government is focused on saving itself."

Meanwhile, Mr. Hockey talked up the potential for small businesses to spearhead a recovery as a decadelong mining-investment boom cools, aided by record-low borrowing costs. "Interest rates are low, the cash in the economy is enormous," the treasurer said. "It just needs the incentive. That moment, the trigger, that is going to unleash that investment."

Separately, he announced a crackdown on multinational companies that send profits offshore to avoid paying tax, saying the practice was unfair to smaller firms.

Mr. Hockey predicted the deficit would fall to A$35.1 billion (US$27.7 billion) in the next financial year and keep on shrinking until a surplus was reached in fiscal 2020. The projections are based on upbeat assumptions about the level at which unemployment is likely to peak and the price to which iron ore, Australia's biggest export, is likely to fall.

Iron ore has shed more than half of its value over the past year, shrinking government tax receipts by as much as A$52 billion, as supply outweighs demand from China, Australia's largest trading partner. Mr. Hockey said he expected prices to continue falling, but that they would average about US$48 a ton over the next fiscal year--not quite as bad as many feared. The jobless rate, currently 6.2%, would peak sometime over the coming year at 6.5%.

"You can always look for the dark side of life," Mr. Hockey said. "You can do that, but not me. I can see it on the ground. People want to have a go." The treasurer also pointed to promising signs in the world economy, such as a return to near-full employment in the U.S., an improvement in Europe and a resurgence of growth in Japan, alongside still-robust expansion rates in China. "This is the growth opportunity Australia has been patiently waiting for," Mr. Hockey said.

Write to Rob Taylor at rob.taylor@wsj.com and James Glynn at james.glynn@wsj.com

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